Asia News

Device Companies Look to Asia for Growth

With the United States emerging very slowly from a huge recession, some of Europe unable to pay its bills, and more restrictions coming from the U.S. Food and Drug Administration (FDA), an area where medical device companies may want to focus on for product growth is Asia.

The gross domestic product (GDP) growth in Asia has increased steadily.

In terms of nominal GDP, Japan is the largest in Asia. In terms of purchasing power parity, China has the largest GDP in Asia and the second largest in the world.

Health and Medical Device Growth

In Asia, especially China, India, and Southeast Asia, there is a growing middle class that can afford more sophisticated medical products. In addition, the government in many Asian countries is ramping up efforts to increase medical insurance coverage and establish more hospitals. Health expenditures as a percentage of the GDP also have increased in many of the Asian markets. For example, Vietnam’s health expenditure as a percentage of its GDP increased from 6 percent in 2005 to 7.5 percent in 2007.
As more of the Asian countries increasingly become developed, the epidemiological profile also is shifting. Increased smoking and eating with less time for exercise means increased health problems, such as cardiovascular disease.

The growth rates for the medical device markets in Asia (excluding Japan) are approximately 5 to 18 percent. For example, India’s medical device market was approximately $1.5 billion in 2006. In 2010, it is expected to be worth more than $2.6 billion. China’s medical device market in 2006 was about $4.5 billion and is expected to grow close to $8 billion this year.

Many of the Southeast Asian countries such as Indonesia, Malaysia, the Philippines, Singapore and Thailand have experienced 10 percent growth in their medical device markets during the last few years, too.

Sales and Exports to Asia

Medical device companies significantly have increased exports and sales in Asia during the last few years. For example, medical device exports from the United States to Japan were $1.9 billion in 2005 and rose to $3.5 billion in 2008.1 With a weaker dollar, rising incomes in all the Asian markets (except Japan), and the need for more sophisticated products, Western device companies’ sales in Asia should continue to grow.

If your firm uses local Asian distributors to sell your products there, the main issue is whether you have the right distributor network and if your company is providing adequate distributor training, service support, etc. Too many device companies pick the wrong Asian distributor and then when sales are not growing, incorrectly conclude that the market for their products is really not that big.

If your firm has its own sales force in the Asian markets, what is the quality of your salespeople? Often, device companies do not provide enough incentives or training to their salespeople to maximize opportunities. If there is high turnover within your sales force, something is probably not right—retaining key people is crucial to long-term success.

Outsourcing and Manufacturing in Asia

In addition to sales, some Western device companies are manufacturing more cheaply in Asia than in the West. While manufacturing in China recently has gotten more expensive compared with Vietnam and India, the quality of locally made devices in China (from both local and foreign companies) is getting better. In the next five years, even some Class III products will be made in China and India at FDA-approved factories.

The last few years have seen new regulations for product registration and increased regulation for many of the Asian countries (e.g., China’s State Food and Drug Administration). In addition, in some cases international level quality standards for device manufacturing in Asia have been mandated.

In Asia, there is good availability of raw materials and equipment as well as a trained labor force with technical/managerial personnel. These factors should enable international companies to start device manufacturing plants in Asia (or at least utilize more qualified suppliers) in addition to relying on export sales. Also, many Asian governments have set up incentives for device manufacturers looking to export. For example, in some Asian countries, the import of raw materials and capital goods to manufacture medical devices is now duty-free. Other Asian countries waive certain taxes.

With increased regulations and new good manufacturing practice requirements, the quality and standard of medical devices in Asia already has risen considerably and will continue to do so in the future.

Research & Development in Asia

Some medical device companies now are doing some of their own research and development (R&D) in Asia. The all-in cost of chemists, engineers and biologists can be a fraction of the cost in the West. Intellectual property also is improving in Asia, albeit at a slower pace than Western corporations would like. As more Asians study science and engineering in the West and return to their home country for good employment opportunities, they also will improve R&D throughout Asia. Local Asian device companies with improved R&D and technical skills (particularly from such Asian returnees) will develop new companies and more sophisticated medical products. Such local Asian device companies then will be able to further compete with Western device companies in the Asian markets.

Foreign device companies that sell only “Grade A”devices will need to set up production of “Grade B” devices or basic models without all the bells and whistles to compete in many Asian markets. With local Asian device manufacturing improving quality and making devices at a lower cost, foreign and local device products will compete for Grade B devices in the developing Asian countries.

Capitalizing on Asia

One of the best ways for Western medical device companies to succeed in Asia is to set up their Asian business with global executives who know Asia. Making sure to have the right people in place for your medical device business is essential around the world, but especially in Asia. One cannot rely just on Westerners to run businesses in Asia where they do not know the local languages and are not completely versed in the local culture or business practices. When in Rome, act like the Romans; when in Japan, have Japanese executives run your device business there.

While a truly global Indian executive can sometimes succeed in East Asia, a local Indian who is not that global will have problems getting Japanese and Chinese executives to follow her/his leadership. Similarly, while a truly global Japanese executive can sometimes succeed in East Asia, local Japanese business leaders who are not international players may have trouble operating outside of Japan, particularly in other Asian countries where employees may still not feel comfortable working for a Japanese boss.

Along with finding top-notch leadership in Asia, it is important that the staff within your Western headquarters be keenly aware of the opportunities in the region. As Jun Tang, president of Microsoft China has said in the past, “China is a priority at Microsoft. Everybody understands that this is a country we cannot lose.”

Organization is Key

In addition to having the right people in Asia, the organization and reporting structures of the regional office need to be correct and workable. For example, it may be fine to have a regional hub for your Asian activities in Singapore or Hong Kong covering the non-Japan Asian markets. However, having your Japanese subsidiary report to Hong Kong or Singapore may be awkward, as device companies’ sales in Japan often dwarf sales in non-Japan Asia. In addition, such a setup may insult your Japanese team, which may prefer to report to the Western headquarters directly.

Most successful medical device companies have a separate Asia business (non-Japan) that reports to headquarters and a separate Japanese office that reports to headquarters on its own.

While the orthopedic sector in Asia is growing at 15 percent per year, this does not mean all Western orthopedic companies that set up in Asia will experience 15 percent growth. If the right employees and organizational structure are not in place, some orthopedic companies may grow less than 15 percent in Asia while others with the right foundation may grow at higher than 20 percent and increase their market share.

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Asia will continue to lead the world’s growth over the next 20 years. Whether Western device companies maximize their opportunities in the region will be a function of understanding the key points outlined in this article.

Reference:

1. USITC Medical Devices and Equipment: Competitive Conditions Affecting U.S. Trade in Japan and Other Principal Foreign Markets. and U.S. Department of Commerce Medical Device Industry Assessment Updated March 24, 2010.

Ames Gross is the president and founder of Pacific Bridge Medical. He is recognized nationally and internationally as a leader in Asian medical markets. Momoko Hirose is vice president at Pacific Bridge Medical. She works on consulting projects and research. For more information, please visit www.pacificbridgemedical.com.